The labor market continues to tighten, so why aren’t wages driving up inflation? Sometimes there’s more to the equation than supply of workers (low) and demand for workers (high). Key actors still bear the scars of the great recession, and will do their part only when there is good reason. The restaurant industry explains it all.

Restaurants are labor-intensive and have relatively high turnover, and their productivity is easy to measure. Labor costs often come out to around one-third of total revenue, so a change in labor costs appreciably hits the bottom line. High turnover means that employers are constantly forced to respond to market wages in real time, so a shock to the labor market will affect restaurants before other industries. And while it may be hard to measure the productivity of someone in a big firm sitting in meetings or manipulating spreadsheets, in restaurants food is either being served in a relatively satisfactory way or it isn’t.

The struggles of restaurants are nothing new, but what’s underappreciated is how much the labor market is contributing to the current pain. Take a company like the Cheesecake Factory. In its third-quarter earnings report back in 2013, when the labor market was looser, labor costs represented 32.1 percent of revenue. Operating margins were 8.2 percent. Fast forward to the third-quarter earnings report this year. Labor costs had risen to 34.9 percent of revenue, and operating margins had shrunk to 6.2 percent. In its conference call, the company guided wage growth in 2018 to 5 percent, in line with many of its peers. As labor pressures have eaten into margins and profits, perhaps not surprisingly, the company’s stock is flat over the past four years.

Lucky for the restaurant industry, even while labor costs have been rising, food costs have been falling. Cheesecake Factory’s cost of sales as a percentage of revenue has fallen to 22.9 percent, from 24.0 percent in the third quarter of 2013. Without this, margins would be even lower.

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It’s possible 2018 could represent a double whammy of rising food costs and accelerating wage growth for restaurants. Commodities have been rallying of late, with the price of crude oil now at a two-year high. And should the labor market strengthen further from here, as it appears to be doing, wage growth might end up being even higher than restaurants are forecasting. If this scenario unfolds, all else equal, margins are set to tumble, with stock prices likely to follow.

But all else is not necessarily equal. Restaurants, like all businesses, can try raising prices. If they can raise prices to offset their rising costs, they can preserve their profit margins. Their inability or unwillingness to do so has contributed to the lagging performance of the industry and stock prices. The cost of eating out has been going up at a rate of only 2.4 percent per year, less than wage growth in the industry.

Perhaps in 2014, 2015 or 2016, when profit margins were high, restaurants had the luxury of deciding not to take a risk by raising prices. But in 2018, it may not be much of a choice. The option might be “raise prices or die.”

If these price hikes materialize, they could be an early indication of inflation getting back on track: Restaurants are more sensitive to labor conditions to most, but all industries are eventually affected.

If the margin pressures on restaurants leave them too cautious to raise prices, we’ll see a wave of restaurant closures and laid-off employees -- another sign that the economy is stuck in a post-recession rut.

- Sen is a Bloomberg View columnist. He is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.

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